WASHINGTON
— ON May 15, 1948, leaders of the international Zionist movement hoisted a blue and white flag emblazoned with the Star of David and founded the state of Israel. Ten days later, after extending diplomatic recognition, President Harry Truman pledged $100 million to keep the nation alive. Earmarked for agricultural settlements, the loan was the first installment of what has become the most extensive program of bilateral aid in history. After 43 years it remains the most visible expression of the extraordinary commitment the United States has made to Israel's survival.

Supporters of Israel say the US's enormous annual contributions are warranted because Israel plays a crucial role in advancing US foreign policy objectives in the Middle East and because US support is essential to the survival of the Jewish state.

Skeptics accuse the US of being overly indulgent with Israel at the expense of other, more needy foreign nations and of pressing problems at home.

As the debate goes on, the trend line of US aid to Israel inches up. From its modest beginnings in 1948, US financial assistance has reached the $50 billion mark, including loans and grants. Measured in real dollars, actual US grants to Israel since 1974 total nearly half the American contribution to 16 European nations under the Marshall Plan.

"It's off the charts," says one congressional expert on US foreign assistance. The principle component of US assistance to Israel is earmarked as amounts of economic aid ($1.2 billion) and military assistance ($1.8 billion), given partly to bolster the 1979 Camp David peace treaty between Israel and Egypt. The second largest US aid recipient, Egypt, receives $2 billion annually. What began as a reward for peacemaking is now viewed in Jerusalem, Cairo, and Washington as a virtual entitlement.

Beyond the basic $3 billion, US assistance to Israel has grown horizontally, outside the confines of the foreign aid budget.

According to a report issued last year by the Congressional Research Service (CRS), most of the extras flow from some of the 43 pieces of special legislation enacted over the years primarily to benefit the Jewish state.

'Cash advance' system

Alone among US aid recipients, for example, Israel receives its entire allotment of economic aid at the beginning of each fiscal year rather than in quarterly installments. The "cash advance" procedure was applied to military aid starting in 1984.

By investing its economic (Economic Support Fund) and military (Foreign Military Sales) aid in US Treasury bonds, Israel earns more than $100 million in annual interest. Meanwhile the US pays up to $110 million in interest on the money it has to borrow to make the advance payments possible, according to the White House Office of Management and Budget.

Israel also has the unique privilege of using a portion of its FMS funds to purchase tanks, missiles, and military vehicles produced in Israel. Historically, the US has insisted that all FMS funds be spent on US products so that American firms and workers will benefit. Draft foreign aid legislation for fiscal 1992 would raise Israel's "offshore" spending limit to $475 million. The US has also allowed Israel to invest a portion of its FMS allotment in research and development, another practice not normal l

y granted since Congress has sought to prevent foreign countries from developing weapons systems that would compete with US products.

Aid to Israel is also free of the strings attached by the US to foreign assistance to some other governments.

Since Israel has no accounting requirements to meet and since economic aid is not designated for specific projects, there is no US Agency for International Development (AID) mission in Israel. By comparison, a 200-person AID contingent oversees the administration of US economic aid to Egypt.

Nor has the US used foreign assistance to apply pressure on Israel to conform to US policy goals. Egypt is required to make economic reforms and adhere to the 1979 Camp David accords. Jordan has pledged to cooperate with US peacemaking efforts in the region to receive its small slice of the US aid pie.

"I don't think the record suggests that you get Israel to move in the direction you want by applying the stick," notes one Congressional source. "On the contrary, you can only expect concessions if you increase [Israel's] confidence and security."

Settlements unaffected

Doubters point out that billions in US foreign aid have not convinced Israel to halt construction of Jewish settlements in the occupied West Bank, a policy the Bush administration regards as the main - though not sole - obstacle to a Middle East peace settlement.

In addition to $3 billion in earmarked funds, lucrative special provisions, and freedom from conditionality, Israel has also profited from the military cooperation that blossomed after it was declared one of only four "non-NATO" allies by the US in 1983.

The designation has enabled Israel to bypass "buy America" restrictions and bid on defense contracts worth hundreds of millions of dollars, including components of the "star wars" antimissile defense system. Meanwhile, the US has said it will spend over $200 million in the coming years for Phase 2 research on a new Israeli antimissile system, the Arrow.

Israel has also benefited from numerous one-shot US contributions, such as $650 million in reconstruction aid granted following the Gulf war, and from a 1986 law that accords Israeli bonds preferential tax rates under certain market conditions.

Just what the various grants, special allocations, and tax breaks add up to is not easy to say with precision. One Israeli diplomat in Washington puts the current figure at $3.65 billion. Factoring in various special allow- ances, congressional sources put it as high as $4.2 billion.

Some diplomatic analysts worry that by giving countries such as Israel and Egypt such a hefty slice of the aid budget - the two command 40 percent of the total - the US may be slighting countries also in immediate need.

Per-capita aid near $1,000

While per capita aid to Israel is nearly $1,000, it is less than $5 for nations like Mozambique and Malawi that are living on the edge of famine or where refugee problems are also acute.

"When we skew our budget, the rest of the world suffers," says John Sewell, president of the Overseas Development Council.

"By the time you get down to Zaire, Yemen, and Bolivia, you're out of cash, the pool's so small," adds a congressional expert on US aid policy.

Lobbyists for Israel insist its needs are fixed and complain that, even with various special benefits, US aid has barely kept up with inflation.

Advocating a solution few believe is viable at a time of deep budget cuts at home, they say the way to meet pressing needs elsewhere is not to trim aid to Israel but to expand the aid program by giving other nations the same benefits Israel enjoys.

"Israel's needs are absolute," says an official of a US Jewish organization. "The question is not whether special privileges are granted to Israel; the question is why this is not done for others."